Australia ‘particularly vulnerable’ to global downturn

The structural deterioration of Australia’s fiscal position over the past decade has left the economy exposed to the next global economic downturn, one economist has warned.

Standard Life Investments chief economist Jeremy Lawson said Australian recessions have historically occurred when the rest of the world was weak.

“Australia hasn’t had a recession for 25 years. But even before that, it was rare for Australia to experience an idiosyncratic recession,” he said.

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But when the next global downturn does happen – and according to Mr Lawson, an eventual correction is inevitable – Australia will be “particularly vulnerable”.

“The [global financial crisis] was concentrated or deepest and most prolonged in the developed economy,” he said.

“[Hardest hit were] those developed economies that had built up large private sector debt imbalances over the previous decade.

“Australia got bailed out mostly by the fact that the commodities cycle had further to run and the massive Chinese stimulus. That’s not going to be available next time.”

Mr Lawson said emerging market economies are likely to do worse in the next global downturn compared to the US and Europe.

“At the same time, Australia will go into that downturn with less fiscal space that it did in 2008/2009 – materially less,” he said.

“Over the last decade, Australia’s had one of the largest structural deteriorations in its fiscal position of any OECD country.

“We were in a really strong position on the eve of the commodities boom, but instead of saving that, it was treated as permanent and so taxes were cut too much, spending was increased too much, so we’ve got a large structural hangover.

“And now any global downturn would be guaranteed to cause a further deterioration.”

In an environment of weak external growth, Mr Lawson said the Australian household sector would become cautious.

“That would produce a cocktail of potentially a deep recession and much larger increase in unemployment than people are accustomed to,” he said.

Mr Lawson said the best thing for Australia to do would be to “get its house in order” with fiscal reforms before the next global downturn hits.

“If that doesn’t occur, I think what you’ll see is Australian living standards decline relative to other developed economies. I think that’s almost inevitable,” he said.